China Consumer

Safety in numbers

Pinduoduo teams up with Gome to challenge Alibaba and other big rivals


Pinduoduo hopes that Gome deal will broaden its reach

Tag team wrestling doesn’t have many fans in China. But its principle of pairing up into stronger alliances is becoming more of a norm in the country’s cut-throat world of e-commerce. Last week another new coalition took shape between a five year-old upstart and an aging competitor that was once a dominant retailer. Unlikely as it sounds, some are bullish that the union is going to work miracles.

On April 19 Pinduoduo announced that it would subscribe for $200 million of convertible notes issued by Gome, a home appliance chain founded in 1987. With a coupon rate of 5% per annum and a tenor of three years (extendable for two more), the bonds can be swapped into a 5.6% stake (on a fully diluted basis) at HK$1.215 apiece, which represents a 66% premium to Gome’s closing price on April 17.

The deal marks Pinduoduo’s first strategic investment from funds raised by a $1 billion private share placement in March.

For Pinduoduo, one of the key commercial challenges is how to increase per capita spend on its platform. Pinduduo reported 585.2 million active shoppers as of last year, versus’s 362 million in the same period, making it the second largest e-commerce platform after Alibaba.

However, its customers spent an average of Rmb1,720 ($243.38) on its platform as of the fourth quarter last year, which was 70% below the spending on

The gap has much to do with Pinduoduo’s initial value proposition of targeting lower-income populations. The company started out as a Groupon-like service that provided group-buying offers and operated a direct-to-consumer model that aimed to keep prices lower through bulk orders (see WiC404). Since then it has tried to target more affluent shoppers, especially following its Nasdaq IPO in July 2018 (see WiC419). But progress has been patchy and it still derived 55% of its gross merchandising value from tier-three cities or below last year.

So how can Gome help? First, Pinduoduo can expand the range of branded electrical appliances that it sells to include the likes of Haier, Midea, Toshiba and Siemens. And aside from helping Pinduoduo to recast its image as a peddler of more premium products, it also opens an avenue for other brands to list their products (many are already under pressure from Alibaba to pick sides between the two competitors, suggests Huxiu, a local news portal).

Second, Pinduoduo can tap the logistics and after-sale support of Gome in its bid to match the fulfilment networks of Alibaba and That includes Gome’s logistics unit Anxun, which has thousands of delivery trucks and hundreds of warehouses, in addition to Gome’s 2,600 bricks-and-mortar outlets that can be used as distribution centres for smaller goods.

Gome’s other subsidiary Guanjia may also provide on-demand cleaning and repair for white goods sold through the online platform.

The hunt for an ally had become more pressing as both Alibaba and turned more of their attention to lower-income regions through Juhuasuan and JingXi – both near carbon copies of Pinduoduo’s offering.

JingXi, in particular, has helped recharge’s user growth. After its launch in September, the Nasdaq-listed firm reported that active users have grown almost a fifth, versus 4% a year previously. A growth spurt in December saw more than 70% of new customers coming from lower-tier cities.

If Pinduoduo is to compete head-to-head with its two larger rivals, the bolstering of its logistics capabilities is essential. While has been relying on a proprietary delivery network to differentiate itself (see WiC488 on how it helped the Beijing-based company during the Covid-19 outbreak), Alibaba enjoys tremendous clout over the country’s major courier companies.

Reuters reported in March that Alibaba is also planning to buy at least 10% of Shanghai-based Yunda. If the acquisition goes through, it will hold stakes in five of the six largest delivery companies in China, including STO Express, YTO Express, Best Inc and ZTO Express, which together controlled 73% of China’s delivery market in 2019, according to 36Kr, a tech news source.

For Gome, the Pinduoduo investment throws a much needed lifeline after it racked up Rmb7.9 billion in losses in the three years to 2019. Since the arrest of its founder Huang Guangyu – once ranked China’s richest man by Forbes – in late 2008 (see WiC36), the company has struggled to regain its former favour with shoppers.

Its market capitalisation has dipped below HK$20 billion, or less than fifth from its peak in 2008, despite efforts from Huang’s wife and private equity investor Bain Capital to turn the company around (see WiC372)

That performance looks even more dismal when compared to rival Suning. The Nanjing-based retailer recorded Rmb9.8 billion in net profit on Rmb378.7 billion in sales last year. Helped by a Rmb6.6 billion stock-swap transaction with Alibaba in 2015 (see WiC292), Suning has grown its points of sale by a factor of five times to 8,216 (see WiC441). It commanded 18% of China’s electrical appliances market last year as the second largest retailer, whereas Gome ranked fourth with a 4.9% share, according to the China Centre for Information Industry Development.

Analysts see Gome’s tie-up with Pinduoduo as an effort to mirror some of Suning’s relationship with Alibaba. In an interview with ICEO, a monthly magazine, CEO Wang Junzhou said Gome is hoping to win new business in lower-tier cities and leverage Pinduoduo’s expertise in Big Data. It tried to expand into e-commerce as early as 2003, but without much success until it started marketing more of its goods on Pinduoduo in 2018 (Gome is now the bestseller on the platform’s consumer electronics category).

Pinduoduo’s shares surged nearly 13% on the trading day following the news of the tie-up, while Gome’s shares rose 16%. It remains to be seen whether investors are right to be sanguine about the deal. The commercial struggle in China’s e-commerce market is ruthless. On April 28, Suning and Juhuasuan announced a doubling of their purchase subsidies for branded consumer electronics to Rmb20 billion, as part of a price war for sales first triggered by Pinduoduo last June.

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